On January 2, 2014, I posted a discussion of five key questions to ask a potential management company. Click here to review that post. Today, we will look at five additional questions.
1. Do you have specific vendors that you work with? Do you receive any type of compensation for recommending specific vendors to Boards?
As one of your property manager’s key responsibilities will be selecting vendors to provide work proposals to the Board, it is important to understand how specific vendors are chosen. Often management companies have lists of preferred vendors that they use regularly. There is nothing inherently wrong with this. In fact, having a manager with experience and strong connections to local vendors is an asset. That being said, the Board should do their best upfront to ensure there are no potentially unethical reasons why a manager may recommend a specific vendor. Conflicts of interest may exist if a manager receives any type of compensation (e.g., cash, professional recommendations, networking opportunities) in exchange for using a specific vendor. A common example of a conflict of interest is key players of a management company having ownership interest in plumbing, maintenance, landscaping or other businesses that an association may hire. A more blatant example would be a management company receiving financial kickbacks from a vendor if a Board hires the vendor. Quite a bit of light has been shed on these conflicts in recent years and management companies have been cleaning up their acts. Still, it is worthwhile to ask the question and judge the manager’s response.
2. Do you have a set minimum threshold for competitive bidding? Are you comfortable with the Board setting a lower threshold than is required by Florida Statutes?
Florida Statute Chapter 718.3026 requires that any project costing more than 5% of the annual budget be competitively bid. Given this, most management companies do not promise competitive bidding below 5% of the association’s annual budget. For a condominium with an annual budget of $100,000, only projects of $5,000 or more would be competitively bid. For a large condominium with a budget of $500,000, only projects of $25,000 or more are required to be competitively bid. In my opinion, 5% is way too high of a figure. I strongly recommend that Boards vote on a lower threshold project size above which competitive bidding is required ($1,000 may be a good starting point). Further, I recommend that Boards confirm with potential management companies that they will honor the lower threshold. More competitive bidding means more work for the manager so the manager may want to adjust their management fee slightly to reflect this lower threshold.
NOTE: It is also worthwhile for the Board to establish a maximum expense amount that the manager may approve without Board consent. Ask the manager what they typically recommend. It often makes sense for the competitive bidding threshold and the manager approval threshold to be the same.
3. Will you be on property to oversee large projects (e.g., painting, paving)? Is there a fee associated with this oversight?
Unless your association has an on-site manager, most management company contracts only guarantee that the property manager will be on-site once per week for 1-2 hours to complete a property inspection. During big projects like painting and repaving, the limited on-site presence of the property manager can leave the Board struggling to meet vendors, review progress, manage parking and traffic patterns, and much more. Many management contracts include a project administration fee (typically 2-5% of project cost) that includes more comprehensive oversight of large projects. This fee is often automatically charged for any projects above a certain dollar amount. Be sure to confirm whether or not there are any additional fees associated with the administration of large projects and clarify what that fee includes. Regardless of whether or not the manager charges a project administration fee, be sure to ask the manager to explain how he/ she will handle a large project that the association expects to take in the near future. This discussion can provide vital insight into the manager’s project management style.
4. Are you comfortable following Board-approved policies?
As is likely clear to those that have read my other posts, I am a strong believer in Board-directed property management. In practice, this translates into Boards drafting and approving policies and procedures for everything from violation identification and fining, to delinquent maintenance fee collections, to rental or sales applications, to the types of door hardware unit owners may choose for their front doors. These polices create a road map for managers to follow and provide obvious metrics against which the Board can review a manager’s performance. These policies also ensure that the manager is acting within the guidelines of the association’s governing documents and that all residents receive consistent treatment.
Most management companies have their own internal policies, particularly relating to maintenance fee collections and violation identification/ fining. They tend to use these same policies and same form letters for every community. For example, the manager’s internal policies may dictate that if a unit owner is more than 90 days past due in paying maintenance fees they are automatically sent to the association’s attorney to have a lien placed on their unit. This may be what the Board prefers. On the other hand, the Board may prefer a different approach (e.g., attempting to work out a payment plan or attempting to garnish rent from a tenant before placing a lien). Because their processes are streamlined and generally applicable to all properties they manage, certain management companies may be reluctant to change their policies for your community. If you are the type of community that wants control over how the day-to-day operations of the association are handled, be sure that the manager is willing to follow all of the Board’s policies and procedures. If you are unsure of how important this is to your Board, consider asking the manager for a copy of their internal policies and reviewing them to determine if they are in sync with the Board’s perspective.
5. How big is your accounting team? What are their qualifications?
As all management companies offer a standard accounting package, many Boards tend not to focus on this aspect of a potential management company. Given the importance of quality bookkeeping, I strongly recommend that the Board take the time to learn as much as possible about the manager’s accounting team. Ask specifically about the size and qualifications (any CPAs on staff?) of the accounting team. Further, request draft financial statements and confirm that the manager is willing to provide customized accounting reports at the request of the Board. Lastly, confirm that the Treasurer of the Board will be able to deal directly with the accountant(s) assigned to your association.
As always, feel free to comment below or shoot me an email.
Emily Shaw is a condominium homeowner in Tampa, Florida and a Director of VERA Property Management, a firm providing full-service community association management in the Tampa Bay Area as well as consulting, financial and legal services to all Florida community associations.